Social Security Income Not Considered in Good Faith Inquiry

Posted on May 21, 2013 5:00pm PDT

A recent 9th circuit decision is an important victory for debtors in the debate of whether Social Security income needs to be considered in calculating the Chapter 13 plan payments. The decision found that Social Security income should not be considered when conducing a good faith analysis under 11 U.S.C. 1325(a).

In the case of In Re Welsh, 465 B.R. 843 (B.A.P. 9th Cir. 2012) the debtors filed for Chapter 13 bankruptcy and proposed to repay $125 a month to creditors for the first 30 months. They had $8116 in current monthly income along with $1165 in Social Security a month which was excluded under the means test calculation. The proposed $125 initial payment to creditors was based on the disposable income available after deducting future payments on secured claims. In the case the trustee objected to the plan on the basis that the plan was not proposed in good faith under 11 U.S.C. 1325(a)(3). Among the reasoned stated for the lack of good faith was that it failed to utilize any of the debtors Social Security Income.

The court addressed the question of whether in the good faith analysis the failure of the debtor to include social security income was basis for finding that the plan was not proposed in good faith. The court found that when debtors have utilized the means test as the bankruptcy code allows to calculate their repayment plan then the exclusion cannot be bad faith. The court found that the failure of the debtors to contribute their social security income to the repayment of creditors would not be considered in the good faith inquiry as long as they had properly calculated the proposed repayment under the means test.

What Does This Mean for Debtors?

The decision will have significant benefits to debtors in a Chapter 13 bankruptcy case. Debtors with Social Security income will be able to propose a payment amount based on a means test calculation of their disposable income which would exclude Social Security as income. This will allow debtors to keep their Social Security income and not contribute it to the repayment of creditors in their bankruptcy case.

In addition, debtors may have the flexibility to contribute a portion of their Social Security income in a Chapter 13 plan when it is necessary to repay past due arrears, or other feasibility issues.

Now that the 9th circuit has concluded that Social Security income cannot be considered in the good faith analysis in a Chapter 13 plan it will be important to see how it addresses the issue of excluding it under in a Chapter 7 bankruptcy in the Totality of the Circumstances analysis. A recent decision in the Central District of California in In Re Suttice, No. 12-21006 (Bankr. C.D. Cal. Jan. 9, 2013) found that Social Security income cannot be considered in the totality of the circumstances under section 707(b)(3)(B).

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